SCARY DEJA-VU OF THE DAY: Citi Plans New Derivative That Pays Off In The Very Unlikely Event Of A Financial Crisis

Credit specialists at Citi are considering launching the first derivatives intended to pay out in the event of a financial crisis. The firm has drawn up plans for a tradable liquidity index, known as the CLX, on which products could be structured that allow buyers to hedge a spike in funding costs.

Like the untraded US rates liquidity index (USRLI), the CLX is constructed as a sum of the Sharpe ratio - deviations from the mean divided by volatility - of various market factors, such as equity volatilities, Treasury rates, swap spreads, corporate bond swaption-implied volatilities, and structured credit spreads. Citi will make the CLX tradable by using fixed historical values for the mean and volatility parameters, eliminating the need for costly recomputation from lengthy time series.